4350 - HUD



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CHAPTER 10. HUD-HELD SERVICING

SECTION 1. INTRODUCTION

10-1. GENERAL. This chapter sets forth policies and

procedures applicable to the servicing of multifamily

housing projects with HUD-Held mortgages under all

sections of the National Housing Act. Consistent with

these procedures is HUD's policy of assuring the

restoration and maintenance of decent, safe, and

sanitary housing as well as limiting losses to the

insurance fund. The objectives of servicing HUD-Held

projects are:

A. Curing financial defaults and physical

deficiencies after assignment by working with the

mortgagor to maximize monthly remittance of

payments, and if necessary, by providing mortgage

relief, consistent with the long-term viability of

the project and the financial interests of the

government.

B. Encouraging the mortgagor to infuse funds, when

necessary.

C. Ensuring that the mortgagor provides adequate

management.

D. Preventing foreclosure where possible, thus,

reducing the potential for further operating

outlays from the insurance fund and the need for

additional rent subsidies.

10-2. DEFINITION OF A HUD-HELD MORTGAGE. For the purposes of

this Chapter, a HUD-held mortgage is described as

follows:

A. A mortgage originated and insured under any

multifamily section of the National Housing Act,

or formerly coinsured loans, endorsed for full

insurance, which has defaulted and been assigned

to HUD.

B. Section 221(d)(3) and Section 221(d)(4) projects

(including 221(d)(5), also known as BMIR) assigned

pursuant to the provisions of Section 221(g)(4).

C. Any mortgage originated through a direct loan to a

non-profit mortgagor/sponsor pursuant to Section

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202 or a capital advance mortgage pursuant to

Section 811 of the National Affordable Housing Act

or Section 202. The capital advance note and

mortgage bear no interest and repayment is not

required so long as the housing remains available

for very low-income elderly persons or very

low-income persons with disabilities (whichever is

applicable).

D. A Purchase Money Mortgage (PMM), created when HUD

sells an acquired property and takes back a

mortgage from the purchaser to refinance the sale.

10-3. TYPES OF DEFAULTS. The mortgagee assigns a mortgage to

HUD and receives mortgage insurance benefits as a

result of the following defaults:

A. Monetary Default - Failure of the mortgagor to pay

any installment payment due, including payments

due under any operating loss loan on any mortgage

insured by HUD. The delinquency must have

continued for 30 days.

B. Mortgage Covenant Default - Failure by the

mortgagor to perform any covenant due under the

provisions of the mortgage.

C. Technical Default - Failure by the mortgagor to

perform any covenant due under the provisions of

the Regulatory Agreement. Assignment based on

technical defaults must be approved by HUD.

10-4. HUD'S RIGHT TO REQUIRE ACCELERATION OF THE DEBT. Upon

receipt of notice of violation of any mortgage or

Regulatory Agreement provision, HUD may require, in

some cases, the mortgagee to accelerate the mortgage

and elect to assign.

SECTION 2. ASSIGNMENT OF MORTGAGE

10-5. GENERAL. One of the goals of HUD is the prevention of

mortgage assignments and protection of the insurance

funds. Cooperation among HUD, mortgagees and

mortgagors is of paramount importance in accomplishing

this goal. However, should the assignment take place,

there are four courses of action available to HUD as

assignee of a defaulted mortgage: 1) to hold the

mortgage in default, 2) require the mortgagor to bring

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the mortgage current, 3) place mortgage under a workout

agreement, or 4) place the mortgage in foreclosure. If

a mortgage is assigned and it is determined that the

mortgagor is unacceptable i.e., has failed to comply

with regulations, the Regulatory Agreement and/or any

subsidy contract terms, and/or has improperly used

project income, the mortgage should be considered for

foreclosure. In addition, HUD will impose the

appropriate administrative sanctions.

10-6. ELECTION TO ASSIGN. The mortgagee may work with the

owner to reinstate the mortgage consistent with

instructions in Chapter 11 of this Handbook, or elect

to foreclose and take ownership of the property. If a

mortgagee submits an election to assign, the owner must

be notified of HUD requirements as mortgagee. The

Field Office is encouraged to give the mortgagor an

opportunity to reinstate the mortgage. Conversely, the

Field Office should begin foreclosure proceedings of

the property if the full cooperation of the mortgagor

cannot be anticipated, or the prospect for ultimate

reinstatement is remote.

A. PROJECT OWNER'S ROLE. Upon assignment, HUD

becomes the mortgagee. Mortgage installments must

be made on time (the first day of the month) in

accordance with the monthly billings issued by

HUD. Failure of the mortgagor to submit timely

monthly installments could result in the immediate

commencement of foreclosure proceedings.

B. HUD'S ROLE. HUD, as the mortgagee for all

HUD-Held mortgages, has a responsibility to collect

the debt. HUD intends to collect that debt in its

entirety through monthly installments, workout

arrangements, restructuring the debt, selling the

mortgage, or foreclosure. If the loan is formerly

coinsured, the Housing Management Director may

utilize the services of Headquarter's management

contractor by requesting the Headquarter's

Government Technical Representative (GTR) to

place the loan in the contractors' work order.

Refer to Chapter 18 in this Handbook for role and

services provided by contractor.

1. Notification to Owner. A letter must be sent

to the owner within 10 working days from the

date the Field Office receives:

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a. the mortgagee's election to assign the

mortgage. See Appendix 1 for a sample

letter, or

b. notice that the mortgage has been

assigned. See Appendix 2a and 2b for

sample letters.

2. The Loan Management Branch Chief must be sure

the following actions are taken:

a. If the assigned mortgage cannot be

brought current immediately, the owner

must submit a written reinstatement plan

in accordance with guidelines in Chapter

11 of this Handbook. A reinstatement

plan is a list of all actions that will

be necessary to bring the mortgage

current and stabilize project

operations.

b. All reinstatement plans must address any

physical or regulatory deficiencies

present at the project and should be

covered in a Management Improvement and

Operating Plan (MIO Plan).

c. If the mortgagor does not develop an

acceptable plan or bring the mortgage

current, the Director, Housing

Management Division must immediately

forward a foreclosure recommendation to

the Regional Housing Director.

3. Complete Financial Analysis must be performed

in accordance with HUD Handbook 4370.1.

Additionally, the Loan Management Branch

Chief shall have a complete financial

analysis made to:

a. Determine what, if any, diversions or

misuse of funds have taken place in

violation of provisions of the Section 8

HAP contract, Regulatory Agreement, or

other HUD guidelines.

b. If a mortgage is assigned during the

first three years after endorsement,

determine whether liabilities existed at

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the time the mortgage was endorsed for

insurance; or if claims were

subsequently made by contractors,

sponsors, or others, in conflict with

the mortgagor's certification that the

project was absent of outstanding

obligations.

c. Determine what, if any, miscellaneous

assets may be available to satisfy any

claims HUD may establish against the

mortgagor or sponsors, including any

judgments resulting from a transfer of

physical assets (TPA), Flexible Subsidy,

secondary financing, workout agreement,

or arising out of failure to satisfy any

guaranty obligation.

d. Determine the miscellaneous assets to be

conveyed to HUD with the tender of title

to the project.

4. On-site Reviews and Inventory of Personal

Property. In accordance with instructions in

Chapter 6 of this Handbook, a management

review and physical inspection of the project

must be completed immediately after

assignment, or must have been completed

within a year prior to the assignment. An

inventory of all personal property at the

project, except that owned by tenants, should

be completed. The inventory should identify

the owner(s) of the personal property. Any

obligations against such property must be

reported, thus making the inventory useful in

determining the existence of corporate assets

that may be proceeded against in satisfaction

of a deficiency judgment. The on-site

reviews and property inventory will assist

the Field Office in determining:

a. the possible existence of waste, fraud,

and/or mismanagement;

b. the approximate cost of repairs

necessary for rehabilitation of the

project; and

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c. the presence of all equipment covered by

Chattel or real estate mortgages, or

that which should have been so covered,

as well as other property used in the

maintenance and operation of the

project.

SECTION 3. REINSTATING DEFAULTED MORTGAGES

10-7. GENERAL. HUD Field Office Loan Management/Asset

Management Branch staff will evaluate each HM-Held

mortgage to determine whether reinstatement is

feasible. Before HUD will consider reinstating the

loan, other than bringing the mortgage current

immediately, the mortgagor must prove to HUD that the

reinstatement plan is in the best interest of the

Department, the tenants, and the project. For a plan

to be considered, it must comply with the requirements

in Paragraph 10-9 below.

10-8. OWNER RESPONSIBILITIES AFTER ASSIGNMENT.

A. The owner must pay all reasonable and necessary

project operating expenses and each month remit

all remaining net cash to the lock box operated by

the Multifamily Notes Branch until a written

reinstatement plan is executed. The project name

and number should be clearly stated and the check

should be sent to:

Multifamily Payment Processing Center

Post Office Box 70764

Chicago, IL 60673

B. The owner will submit Monthly Accounting Reports,

Forms HUD-93480, 93481 and 93482, a plan for

mortgage reinstatement in accordance with Chapter

11 of this Handbook, and a plan for property

improvement, where needed. Copies of the HUD

Forms should be enclosed with the letter sent to

the owner.

C. The owner will submit to the Field Office within

30 days from the date of the letter a plan for

mortgage reinstatement in accordance with Chapter

11 of this Handbook and property improvement,

where needed. The letter must state that HUD

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expects to have a written reinstatement plan in

effect within 90 days following mortgage

assignment.

10-9. OWNER REQUESTS FOR RELIEF. The owner's request for

relief must be in writing and must state the basis for

needing the relief sought. The Loan Management/Asset

Management Branch staff is responsible for determining

the cause of default and that reinstatement is not

beyond the realm of reasonable possibility. The owner

must be able and willing to:

A. Demonstrate that default is not a result of any

deliberate or voluntary action.

B. Restore to the project any funds or assets

improperly withdrawn, distributed or disbursed.

C. Correct any conditions constituting violations of

the Regulatory Agreement or Section 8 HAP

Contract.

D. Provide and maintain management acceptable to HUD.

E. Correct any physical deficiencies and make general

upgrading repairs or whatever extensive renovation

the project may require.

F. Make additional funds available, where necessary.

SECTION 4. GENERAL SERVICING REQUIREMENTS

10-10. GENERAL. While emphasis must be placed on servicing

HUD-Held mortgages which are in default, mortgages

current under the terms of the mortgage require the

same monitoring that insured mortgages receive.

Assistance should be given project owners in their

efforts to achieve sound operations. However, the

responsibility for liquidation of the mortgage debt

rests with the property owner, not with HUD. The

Director, Housing Management Division and Loan

Management Branch Chief in each respective Field Office

have direct responsibility for servicing HUD-Held

mortgages. The project owners should be informed that

all inquiries concerning operation of the project are

to be addressed to the Field Office staff.

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10-11. MONTHLY ACCOUNTING REPORTS. Upon receipt of a notice

of election to assign a mortgage, Monthly Accounting

Reports, Forms HUD-93479, 93480, and 93481, including

project net cash, must be submitted by the project

owner. These reports will assist in determining the

owner's compliance with HUD requirements and the terms

of any workout arrangement requested, identifying

diversions of project assets and assessing owner's

performance. The monthly accounting reports should be

analyzed upon receipt by the Loan Management Branch

staff. Detailed procedures for review and analysis of

monthly accounting reports are contained in HUD

Handbook 4370.1. Loan Management/Asset Management

staff should also review the Statement of Multifamily

Mortgage Account & Notice of Mortgage Payment Due (Form

HUD 2771) to be sure the owner is submitting the

required monthly payments. If the owner is not

submitting the required monthly payments or is in

violation of any financial commitment, the Loan

Servicer/Asset Manager must contact the project owner

and inform him/her of the importance of timely and

accurate payments. If the owner fails to respond, the

Loan Servicer/Asset Manager and Supervising Loan

Servicer or Loan Management Branch Chief must develop a

plan of corrective action and contact the owner with

the necessary requirements.

10-12. FINANCIAL STATEMENTS. Annual audited financial

statements must be prepared, submitted, and reviewed in

accordance with instructions in HUD Handbooks 4370.1

and 4370.2.

10-13. HAZARD INSURANCE. Unlike procedures for insured

mortgages, HUD, as the mortgage holder, does not escrow

hazard insurance premiums. Project owners must

establish an insurance escrow account in accordance

with Chapter 21 of this Handbook in order to assure an

adequate balance when the premiums are due. This

should include any deductible amount required by the

insurance carrier.

10-14. TAXES. HUD bills project owners for real estate taxes

in an amount sufficient to have adequate escrow

balances to pay taxes before the due date. Generally,

this means that the entire amount due the State or

local government must be fully escrowed thirty (30)

days before the due date so the taxes may be paid

before the penalty date.

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10-15. UNIFORM COMMERCIAL CODE (UCC) REQUIREMENTS. Upon

assignment to HUD, the assigning lender is required to

also assign its security interest in chattels,

including materials. (A chattel is any article of

tangible property other than land, buildings, and other

property purchased with mortgage proceeds or income

from the project). The mortgagee must warrant that:

A. No act or omission of the mortgagee has impaired

the validity or priority of the lien created by

the chattel security instruments;

B. the mortgagee has a good right to assign the

security instruments; and

C. the chattel security instruments are a first lien

on items covered by the instruments except such

other liens or encumbrances as may be approved by

the Commissioner.

Under UCC requirements, HUD must file a report

periodically (every 5 years or as state law requires)

to assure that a lien on such chattels remains in

effect until the mortgaged property is paid in full or

foreclosed. Therefore, it is essential that an

accurate inventory be maintained by the project owner

of the personal property fixtures and equipment

belonging to the project. These inventories should be

reviewed at least every two years by the Loan

Management staff to assure that no asset is taken from

the property without adequate compensation to the

project.

10-16. FUNDED RESERVES must be maintained in accordance with

the mortgage document and instructions in this

Handbook.

10-17. USE OF PROJECT FUNDS. An owner may not use project

funds to pay an attorney, agents, or representatives to

develop a workout proposal for HUD to consider and/or

to advocate that HUD approve the plan. Further,

project funds may not be used to defend a foreclosure

action or to pay for a bankruptcy action.

10-18. SURVEY OF TENANTS IN ASSIGNED PROPERTIES. Each Field

Office must ensure that unassisted tenants in projects

with assigned mortgages are surveyed as indicated

below. Section 203 of the Housing and Community

Development Act of 1978, as amended by the Housing and

Community Development Act of 1987 and the Stewart B.

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McKinney Homeless Assistance Amendments Act of 1988,

requires HUD to preserve, in unsubsidized insured

projects, the affordability of "at least the units that

are occupied by low and moderate income persons on the

date of assignment or foreclosure, whichever is

greater." Whenever a project is assigned to HUD, the

Field Office must:

A. Complete questions 1-8 on the form entitled

"Projects with Assigned Mortgages" for each

project upon assignment. The Projects with

Assigned Mortgages data sheet and the instructions

are found in Exhibit 1 and 1A to this Chapter.

B. Prepare an Income Chart for Projects with Assigned

Mortgages, using the list of HUD Annual Median

Income Limits which is prepared for the Section 8

Program and the list of HUD Annual Median Income

Limits which is prepared for the Section 221(d)(3)

and Section 236 programs. A Format of the Income

Chart for Projects with Assigned Mortgages are

found in Exhibit 2 to this Chapter.

C. Distribute to each project owner whose mortgage

has been assigned to HUD, a packet which includes

the forms listed below:

1. a copy of the "Projects with Assigned

Mortgages," summary of tenant income data

form (with questions 1-8 completed), (Exhibit

1 and 1A to this Chapter).

2. a copy of the "Income Chart for Projects with

Assigned Mortgages," (Exhibit 2 to this

Chapter).

3. a copy of the "Tenant Income Survey,"

(Exhibit 3 to this Chapter),

4. a copy of the "Privacy Act Notice Statement,"

(Exhibit 4 to this Chapter).

5. a letter to the owner, specifying the date by

which the surveys are due back to the Field

Office.

D. Retain the survey documentation in the project

file. The survey results must be utilized in

determining the amount of subsidy and number of

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Section 8 units that may be provided to the

low-income tenants at any foreclosure sale.

E. Send the Tenant Survey and Privacy Act Statement

directly to each resident in the project, in those

cases where the owner refuses to distribute the

survey or will not return the results to the Field

office. The survey must be modified to reflect

Field office origination.

SECTION 5. SERVICING PARTIAL PAYMENT OF CLAIMS MORTGAGES

10-19. GENERAL. HUD may, with the concurrence of the

mortgagee, make a partial payment of an insurance claim

on a defaulted mortgage covering certain multifamily

housing projects. The mortgagee would agree to accept

partial payment in lieu of full assignment and to

recast the remaining mortgage balance. The mortgagor

must give HUD a second mortgage on the property for the

amount of the partial payment. The option to permit a

partial payment of claim may be exercised when it is

determined by HUD that such relief would be less costly

to the Federal Government than other reasonable

alternatives for maintaining the low and moderate

income character of the project. A more detailed

discussion of partial payment of claims and eligible

project is included in Chapter 14 of this Handbook.

10-20. OWNER REQUIREMENTS. Under the terms of the second

mortgage, the owner is required to do the following:

A. At a minimum, the owner is required to pay a

service charge of .5 percent of the second

mortgage per month. Each second mortgage document

must be reviewed to determine the date the

mortgagor must begin making debt service payments.

B. The owner must submit all net cash derived from

project operations. There will be no

distributions to any type owner until the second

mortgage is brought current.

C. Submit Monthly Accounting Reports, Forms HUD

93479, 93480, and 93481 until debt payment service

payments begin, or as determined by the Loan

Management Branch Chief.

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10-21. FIELD OFFICE RESPONSIBILITIES. Partial payment of

claims may be initiated at the Field Office level, but

final approval will be given only by the Assistant

Secretary for Housing. The Field Office is responsible

for monitoring the compliance of the owner as it

relates to the conditions of the second mortgage. Once

debt service payments begin, the owner is subject to

the requirements discussed in Chapter 11 of this

Handbook. Serious consideration shall be given to the

overall cost to HUD prior to the Field Office

recommendation for foreclosure on the second mortgage

if the first mortgage is still insured and current.

A. The Field Office must establish a project file

comprised of the closing documents of the newly

created HUD-Held loan. This file will contain all

pertinent data.

B. Upon receipt, Loan Management staff must review

all Monthly Accounting Reports, Forms HUD-93479,

93480, and 93481. The Statement of Multifamily

Mortgage Account & Notice of Mortgage Payment Due

(Form HUD-2771) must also be reviewed to ensure

that the owner is forwarding the required service

charge, and net cash. Further, the Field Office

will establish a tickler system to ensure all

funds under the workout are paid as required.

This tickler/control will also track all Letters

of Credit or special conditions of the Workout

and/or Management Improvement (MIO) Plan.

C. The Field Office should consider all partial

payment of claims projects as troubled and service

accordingly until the second loan is recast and is

paying current or the Loan Management Branch Chief

makes a finding that the projects are no longer

troubled.

SECTION 6. SECTION 202, AND 202/8 LOANS AND ADVANCES

10-22. GENERAL. Section 202 direct loans are long-term low

interest rate loans made by HUD to non-profit borrower

corporations formed to provide rental housing for

elderly and handicapped persons. As such, these HUD

loans have no mortgage insurance and HUD serves as

mortgagee. Capital advances pursuant to section 202

and Section 811 of the National Affordable Housing Act

will assist owners in financing rental housing for

low-income elderly persons and low-income persons with

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disabilities. Regional Accounting Division (RAD) is

the custodian of all Section 202 loan instruments.

A. Monthly amortization payments are for principal

and interest only.

B. Projects that are current in amortized payments

are not billed.

C. Requests for loan balance should be made directly

to the RAD.

10-23. DEFINITIONS

A. Sponsor - the applicant for the section 202 loan.

The sponsor forms a non-profit corporation which

becomes the "Borrower" to engage in the project

business and to operate the project.

B. Borrower - the non-profit corporation, consumer

cooperative, or public entity designated. The

term Borrower also is synonymous in this Chapter

with mortgagor, owner, and Board of Directors.

10-24. BASIC DOCUMENTS. The basic documents which set forth

the Borrower's responsibility and provide HUD control

of project operations are the Regulatory Agreement, the

mortgage, the mortgage note, and the loan agreement.

A. The Regulatory Agreement is between the Borrower

and HUD. The Borrower agrees to protect the

interests of itself, HUD, and the tenants.

B. The Mortgage (or Deed of Trust) is the document

which pledges the property as security for the

Mortgage Note. It is the key document in the loan

transaction.

C. The Mortgage Note ("Note" or Deed of Trust Note)

sets forth the amount of indebtedness owed HUD by

the Borrower and the manner in which the debt

shall be satisfied.

D. The Loan Agreement, used only with loans made

prior to 1974 (project numbers preceded by SH) and

in conjunction with the Regulatory Agreement. It

defines procedures to be used in the operation of

the project, details the proceedings necessary for

the authorization, execution, and issuance of the

Mortgage Note, details construction requirements,

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sets forth insurance requirements, etc. It also

prescribes the establishment of special accounts,

i.e., debt service reserve, revenue fund account,

tax and insurance escrow, and repair and

replacement reserve account, and details the flow

of revenues into these accounts. The Regulatory

Agreement prescribes escrow accounts and their

funding for loans made since 1974.

10-25. REQUIRED ACCOUNTS. Each Borrower corporation is

required to maintain the following accounts:

A. Revenue Fund Account/Operating Account is the

basic operating account where all rentals,

charges, income, and revenue arising from

operation and ownership of the project are

deposited. This is also the account from which

current expenses (except taxes and insurance) and

debt service requirements are paid. Payments from

this account must be made in accordance with the

Loan and Regulatory Agreements.

B. Tax and Insurance Escrow. One-twelfth of the

annual requirement for ground rents, insurance

premiums, taxes, special assessments, etc., shall

be transferred monthly from the Revenue Fund

Account to this account. Expenditures from this

account should be made as assessments come due to

avoid late charges.

C. Reserve for Replacement and Residual Receipts

Accounts are funded as specified in the Regulatory

Agreement or Loan Agreement. Disbursements from

these funds may be made only after the consent in

writing of HUD. Funds are maintained and invested

according to instructions found in Chapters 4 and

25 of this Handbook.

D. Debt Service Reserve account is required for

Section 202 loans made prior to 1974 (project

numbers for these loans are preceded by SH).

Deposits must be made annually until the balance

required in the Loan Agreement is reached. No

withdrawals may be made from this account without

prior HUD approval. If the balance in the account

falls below the required amount as outlined in the

Loan Agreement, annual deposits will be

reinstituted in order to restore and maintain the

required account balance. Funds in this account

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are maintained according to the instructions in

Chapter 27 of this Handbook.

10-26. RENT INCREASE REQUESTS AND ANNUAL OPERATING BUDGETS are

submitted, reviewed, and processed according to

instructions in Chapter 7 of this Handbook.

10-27. ANNUAL FINANCIAL STATEMENTS must be submitted and

reviewed in accordance with the instructions in HUD

Handbooks 4370.1 and 4370.2.

SECTION 7. DEFAULT SERVICING OF SECTION 202 PROJECTS

10-28. GENERAL. For Section 202 projects in financial

difficulty, Loan Management/Asset Management staff

should seek to prevent (or cure) the delinquency, while

assuring that escrow accounts for taxes and insurance

funded at appropriate levels. Prior to granting any

relief or waivers, the Loan Management/Asset Management

staff must determine the sponsor's ability to advance

funds for curing the default and must be sure that:

A. The Borrower is operating in compliance with the

mortgage, Loan Agreement and Regulatory Agreement.

B. Project Management is satisfactory.

C. Rents are at a sustaining level.

D. The physical condition is satisfactory.

E. The default is not the result of any deliberate or

voluntary action on the Borrower's part.

10-29. DEFAULTS AND ADVERSE TRENDS. When there is a default

or an adverse trend, the Loan Management/Asset

Management staff should contact the Borrower to

ascertain the cause and require the Borrower to begin

submitting Monthly Accounting Reports, Forms HUD-93479,

HUD-93480, and HUD-93481 as discussed earlier. Careful

monitoring of these reports are necessary to detect

areas within project operations which may be causing

the default.

10-30. WAIVER OF RESERVE DEPOSITS AND SCHEDULED PAYMENTS. The

Director, Housing management Division, may waive

deposits to the Reserve for Replacement Account, and/or

authorize use of the Debt Service Reserve Account in

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order to forestall a default or to cure one. However,

prudent use of these funds is necessary in order to

maintain the appropriate balance.

10-31. RELIEF AND REINSTATEMENT OF DEFAULTED SECTION 202

LOANS. Workout arrangements have not been delegated to

the Field Offices for Section 202. Relief for Section

202 mortgages in default may include suspension of

payments to the Reserve for Replacement as discussed

above. For terms of workout arrangement

recommendations, see Chapter 11 of this Handbook.

10-32. PARTIAL RELEASE OF SECURITY. In most cases, the

procedures which apply to the release of insured or

HUD-Held mortgages also apply to Section 202 projects,

However, the Section 202 project owner must apply the

entire amount received from the release to the unpaid

principal balance of the loan. In the event of

delinquent loan payments, the amount received from the

release will be applied to any delinquency, then to

outstanding principal. Should the payment result in a

substantial reduction of principal, HUD may recast the

loan over the remaining term. This may result in a

rent decrease and/or lessen the amount of future rent

increases.

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SECTION 8. APPLICATION OF FUNDS TO INDEBTEDNESS

10-33.HUD may on occasion auction, sell, or assign HUD-Held

notes and mortgages. When the Department disposes of

these mortgages there may exist funds that were held in

escrow at the time the mortgages were assigned to HUD

as well as funds accumulated in the escrows during the

period that the mortgages were held by HUD. When such

loans are in default and are auctioned, sold, or

assigned by HUD without mortgage insurance, HUD will

apply the funds in the Reserve Fund for Replacements

account to amounts due to the Department before the

loans are transferred. However, in any case where the

loan is subject to a provisional workout arrangement

and the mortgagor is in compliance with the provisional

workout arrangement, the Department will not apply the

funds in the Reserve Fund for Replacements account to

amounts due to the Department before the loan is

transferred if (i) the provisional workout arrangement

specifically provides that the Department will take no

action to apply the Reserve for Replacement funds to

the indebtedness if the loan is auctioned, sold, or

assigned by it without mortgage insurance, or (ii) the

Department has agreed in the provisional workout

arrangement to specific applications of the Reserve

Fund for Replacements. The Department also may and in

most cases will apply any funds held in other escrows,

such as Residual Receipts accounts and tax escrow

accounts, to delinquent sums due under the notes and

mortgages.

3/95 10-16a

_____________________________________________________________________

4350.1 REV-1

EXHIBIT 1

________________________________________________________________________

PROJECTS WITH ASSIGNED MORTGAGES

Project Data and Summary of Assisted Units (to be completed by

Field Office and reviewed by owner/manager).

1. FHA number/Section 8 Contract Number ____________________________

2. Date Mortgage Assigned ___________________________________________

3. Property Name ____________________________________________________

4. Property Address _________________________________________________

5. Geographical Area ________________________________________________

6. Total Units in Projects __________________________________________

7. Number of Units in Section 8 Contract ____________________________

8. Number of Tenants Receiving Section 8 Assistance at Date of

Assignment (tenants with current 50059) ________________________

Summary of Unassisted Units (to be completed by owner/manager)

9. Number of Tenants Receiving Assistance under Section 8

Existing or Housing Voucher Program

10. Number of Units Not Responding

11. Number of Vacant Units

12. Number of Units with low-income Tenants (0-80%)

13. Number of Units with moderate income tenants (81-95%)

14. Number of Units with higher income tenants (over 96%)

________________________________________________________________________

10-17 9/92

_____________________________________________________________________

435061 REV-1

EXHIBIT 1A

________________________________________________________________________

INSTRUCTIONS FOR OWNERS OF PROJECTS WITH ASSIGNED MORTGAGES

A. Distribute tenant certification to each unit for which there

is no current 50059 on file. Include a stamped,

self-addressed envelope for each certification and specify a

telephone or other contact and a date for return of the

surveys.

B. Gather and separate the tenant certifications by number of

tenants residing in the unit.

C. Sort tenant certifications into income levels according to

the chart covering your geographical area provided by the

Field Office.

D. Fill in questions 9-14. (Field Office should have completed

questions 1-8. Please check this information for accuracy.)

E. Return the completed Projects with Assigned Mortgages form

to the Field Office, along with the tenant surveys collected

by one month from the date of this letter.

________________________________________________________________________

9/92 10-18

_____________________________________________________________________

4350.1 REV-1

EXHIBIT 2

________________________________________________________________________

INCOME CHART FOR PROJECTS WITH ASSIGNED MORTGAGES

(FORMAT)

Geographical Area ______________________________________________________

INCOME FAMILY SIZE

CLASSIFICATION (number of persons)

1 2 3 4 5 6 7 8

______________________________________________________

Low Income

(0-80%)

______________________________________________________

Moderate

Income

(81-95%.)

______________________________________________________

________________________________________________________________________

10-19 9/92

_____________________________________________________________________

4350.1 REV-1

EXHIBIT 3

________________________________________________________________________

TENANT INCOME SURVEY

Dear ________:

We are required by the Congress, under the Housing and

Community Development Act of 1987, to collect the following

information about household incomes of the tenants in this

complex. Because the law is concerned with the preservation of

housing affordable to low and moderate income persons, it may be

to your benefit to respond if you feel you fit into these

categories.

We will send a summary of the income levels of the people

living here to the U. S. Department of Housing and Urban

Development (HUD). The attached Privacy Act Statement explains

the authority, purposes, and uses of this information collection.

Please read the Privacy Act Statement thoroughly, sign the

certification, and return the survey in the enclosed envelope by

_________________. If you have any questions, please contact us

at _______________________. Thank you for your cooperation.

Sincerely,

1. Unit Number __________

2. How many people live in your unit? _________________________

3. How many bedrooms does your unit have? _____________________

4. What is the combined annual income of

all the people living in your unit ___$__(approx)___________

5. I certify that the above information is true and complete to

the best of my knowledge.

__________________________________

Signature of person

whose name is on the Lease

________________________________________________________________________

9/92 10-20

_____________________________________________________________________

4350.1 REV-1

EXHIBIT 4

________________________________________________________________________

PRIVACY ACT NOTICE STATEMENT

Read this before you sign the tenant income certification.

The Department is authorized by the Housing and Community

Development Amendments Act of 1978, as amended by the Housing and

Community Development Act of 1987 and the Stewart B. McKinney

Homeless Assistance Amendments Act of 1988, to collect

information relating to the income level of certain unassisted

tenants in projects with assigned or foreclosed mortgages. The

information being collected with this survey will enable HUD to

determine the number of units it must maintain as affordable for

low and moderate income persons. The information will be used in

establishing the income classification of unassisted tenants.

The information will be used to divide respondents into the

categories of very low, low, or moderate income. When a property

is disposed of, the information may be used to identify specific

units and unit types which should be retained as affordable, and

may be used in determining what type of assistance can be

provided to the project. The information may be provided to new

owners entering into a Housing Assistance Payments Contract with

HUD. Also, HUD may disclose this information to Federal, State,

and local agencies when relevant to civil, criminal, or

regulatory investigations and prosecutions. It will not be

otherwise disclosed or released outside of HUD, except as

required and permitted by HUD. Individuals choosing not to

participate in the survey cannot be prosecuted for failing to

respond. However, it the Department does not know that the

respondent's unit is of low or moderate income, it can not make

provisions for that unit in its plans for disposing of the

project.

________________________________________________________________________

10-21 9/92

_____________________________________________________________________

4350.1 REV-1

APPENDIX 1

________________________________________________________________________

LETTER TO OWNER UPON RECEIPT OF THE LENDER'S

ELECTION TO ASSIGN

Mortgagor

Address

Dear _____________:

HUD has received the mortgagee's election to assign to the

Secretary the defaulted mortgage on (Project Name ____________),

(HUD Project No. ________________). In accordance with policy

guidelines, if this mortgage is assigned, HUD will put this

mortgage into foreclosure immediately after the assignment has

been completed.

In order for the assignment and foreclosure action to be

avoided, you must bring the mortgage current immediately by

paying all delinquencies. If you cannot bring the mortgage

current immediately, and it is assigned, you must submit a

reinstatement plan designed to bring the mortgage current through

principal within 36 months of the assignment. The reinstatement

plan must be submitted to this office within 30 days of the date

of this letter. Guidelines for any reinstatement plan include,

but are not limited to:

1. Generally, the mortgage must be brought current through

principal in no more than 36 months from assignment.

2. The reinstatement plan must provide that you make any

necessary repairs.

3. HUD will not capitalize any delinquent interest.

4. HUD will not recast any principal on unsubsidized

projects. HUD may consider recasting principal on

subsidized projects if justification can be presented.

Sincerely,

Director,

Housing Management Division

________________________________________________________________________

9/92 10-22

_____________________________________________________________________

4350.1 REV-1

APPENDIX 2A

________________________________________________________________________

FORMAT - LETTER TO OWNER AT DEFAULT ASSIGNMENT

(Letter may also be sent on behalf of HUD by the

Asset Management Contractor for formerly coinsured loans)

Addressee: Project Owner

Subject: Project Number, Name, and Location

Dear________________________,

The mortgage on the above project was assigned to the

Department of Housing and Urban Development on (date). As HUD

is now the lender, you must submit your plan for reinstating the

loan or arrange a meeting in our office to discuss a

reinstatement plan within 30 days. The Department expects to

have a written reinstatement plan in effect within 90 days.

Effective immediately, you are to pay all reasonable and

necessary project operating expenses and each month remit all

remaining net cash to the lock box operated by the Multifamily

Notes Servicing Branch. All monthly payments are to be made to

the lock box. The project name and number should be clearly

stated and the check sent to:

Multifamily Payment Processing Center

(Field Office insert correct address)

HUD does not currently escrow for property insurance.

Therefore, you must arrange for insurance coverage as required by

the mortgage and make premium payments either from project income

or other sources. Insurance escrows were terminated at mortgage

assignment and any funds in the escrow were applied to sums due

under the mortgage.

Until you bring the mortgage fully current you are

prohibited from taking any owner distribution, repaying any funds

advanced to the project, or repaying either interest or principal

on any project obligation junior to HUD's mortgage. Section 239

of the National Housing Act prohibits the willful use of project

funds for purposes other than actual and necessary operating

expenses (including debt service requirements) while a loan is in

default. Section 239 further provides for penalties of fine

and/or imprisonment.

In addition, you are required to submit Monthly Reports for

Establishing Net Income, Forms HUD-93479, HUD-93480 and HUD

93481, copies enclosed.

________________________________________________________________________

10-23 9/92

_____________________________________________________________________

4350.1 REV-1

APPENDIX 2A

________________________________________________________________________

It is imperative that you operate in accordance with a

HUD-approved Workout Arrangement which is based on your reinstatement

proposal. Your proposal should outline how you plan to reinstate

the mortgage (bring it current and resume full amortization)

within 36 months. Your plan should also demonstrate that you:

1. Did not cause the default by any deliberate or

voluntary act;

2. Have restored to the project any funds or assets

improperly withdrawn, distributed or disbursed;

3. Will correct any conditions constituting violations of

the Regulatory Agreement or Section 8 HAP Contract and

thereafter conform to its requirements;

4. Will provide and maintain management

acceptable to the HUD Loan Management Branch

Chief; and

5. Will correct any physical and financial

deficiencies and make any general upgrading

repairs or renovation the project may

require.

Unless you have already submitted a detailed reinstatement

plan, you must, within 30 days from the date of this letter,

arrange a meeting in our office to discuss the terms and

conditions of an acceptable proposal. Any questions you may have

can be answered during the meeting. It is essential that you

submit your written reinstatement proposal within 30 days of the

meeting because, as noted above, HUD expects to have a written

reinstatement plan in effect within 90 days following assignment.

In the event no acceptable plan is submitted within that time

period, this office will initiate foreclosure.

To arrange a meeting time, you should contact (Loan

Specialist's Name) at (Telephone No.). We look forward to

working with you to reinstate this loan.

Sincerely,

Director,

Housing Management Division

Enclosures

________________________________________________________________________

9/92 10-24

_____________________________________________________________________

4350.1 REV-1

APPENDIX 2B

________________________________________________________________________

FORMAT - LETTER TO OWNER AT G-4 ASSIGNMENT

Addressee: Project Owner

Subject: Project Number, Name, and Location

Dear_________________________:

The mortgage on the above project was assigned to the

Department of Housing and Urban Development on ___(date)____.

Each month you should remit the scheduled mortgage payment to the

lock box operated by the Notes Receivable Branch. The project

name and number should be clearly stated and the check sent to:

Multifamily Payment Processing Center

(Field Office insert correct address)

If you should have any questions regarding this matter,

please contact (Loan Specialist) at (telephone number).

Sincerely,

Director,

Housing Management Division

________________________________________________________________________

10-25 9/92

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